When harsh financial conditions require you to seek alternative ways to remain afloat, filing for bankruptcy is one of the most viable options you have. Depending on the type of bankruptcy you file for, you can retain your property, including rentals you own, and have let or leased out to tenants. Filing for bankruptcy also means that you receive some protection from your creditors through the court. The court orders restrain the creditors and trustees from making sudden decisions to take over your property without undertaking requirements. Once you have successfully filed for bankruptcy, your status will give you room to explore several options that will save your rental property and the tenants residing there from mandatory evictions until the situation is done.
While filing for bankruptcy is a natural choice for anyone going through a challenging monetary crisis, the process requires you to have professional legal guidance and support that prevents you from missing small details that could cost you later. Thus, it is important to consider including a bankruptcy attorney's services when filing to help you go through each process successfully. At the San Diego Bankruptcy Attorney, we provide legal advice and representation in court for any client in San Diego, California, seeking to file for bankruptcy. Our vast experience in Bankruptcy law has equipped us with the knowledge you need to help you undergo a successful application that will offer protection for your property even as you settle your debts.
The Effects of Filing for Bankruptcy on the Landlord and Tenant
Usually, the petition filed to declare you bankrupt requires you to undertake several procedures and provide necessary documentary evidence of your inability to sustain making payments to your creditors. Additionally, since filing for bankruptcy will release you from your engagements in repaying debts, it is essential to note that the courts will scrutinize your financial status in the future. The judge will also require you to explain your financial developments years after resolving your state of bankruptcy.
When filing for bankruptcy, it is vital to consider whether you prefer liquidating your property or undertaking reorganization processes to retain your rentals. Choosing either of the types of bankruptcy will affect your tenants, depending on the circumstances they face in payment of rent. The main types of bankruptcy you can file for are:
Chapter 7 Bankruptcy
Filing for Chapter 7 bankruptcy results in a liquidation process. It means that you will hand over all your property to a trustee group who will take over the asset liquidation procedure. Once you present your petition in court, the presiding judge will assess the submissions. Suppose he/she approves of the submissions. In that case, you will receive an automatic stay of execution to prevent creditors from coming after your assets, thanks to your action of filing for the bankruptcy. Section 362 of the Bankruptcy Code allows the automatic stay to protect you from any direct contact with a creditor, exceptionally if a trustee is appointed to handle your assets.
The court will appoint independent trustees who have no bias towards you or your creditors. His/her primary role is to authorize the liquidation and transfer money to creditors as settlement of the debt.
Since the trustee works under court directives, he/she will often prioritize certain types of debt called the unsecured priority that involves making payments for child support, tax debts, and liabilities for the personal injury you may have imposed on others. After making settlements for the unsecured debts, the trustee will settle any secured debt you have like bank loans. Making payments for secured debt means that you have to provide collateral to reduce the risk that your creditor may face in case of default in making payments.
Effects of Filing for Chapter 7 Bankruptcy
The effect of Chapter 7 bankruptcy on your rental property is that you will have to turn them in for your trustee to handle liquidation procedures. He/she considers any investment property that is non-exempt from your retention, as long as it provides enough equity to pay the parties you owe money. For example, suppose your rental property was a bungalow home that had a tenant residing in it. In that case, it is up to the trustees to decide whether they will file for court orders to evict the tenant in due time, or retain them and collect rent from them to pay off your debts.
The trustee's deliberation will weigh the rental property value once it is sold without any occupants for the new owners to decide on what to use it for. On the other hand, the trustees will consider whether the rental property is more marketable when sold to a new owner under an agreement to collect rent from your tenants. The decision that is likely to bring in more profit for the trustees to use in settling your debts is what the court will approve of, mainly because the judge makes decisions for a creditor’s benefit. You should remember that as soon as the judge appoints a trustee to take over your property, you have no control over individual decisions made, including the selling prices and subsequent agreements that the trustees enter for the liquidation of your property.
Consequently, your tenants may receive prior notice of eviction from the trustees asking them to move by a specific date to allow them to liquidate your rental property and use the money in debt settlement. Alternatively, the tenants may continue living in your property but may be subject to pay rent to the new owners.
Throughout the liquidation procedure, your trustees will communicate with your tenants and send official notices of each developing matter. For example, if you are no longer the owner and landlord of the rentals, your tenants will receive a letter informing them of who the new owner is, and the account details to send rent to. Your tenants will receive several avenues for their use to verify whether the new information matches the disclosed ownership.
Upon verification that the new landlord's details match his/her identity, the tenants will have to make rental payments to the new owner. You must urge your tenants to follow the trustees' instructions to make payments to the new property owners, as misdirected payments will set you back on clearing your debts. The tenants should also uphold a consistent trend in making rent payments to reduce the risk of eviction from the new property owners who may introduce specific lease or rent terms that are not as accommodating as you were.
Moreover, it is vital to check on your new tenants’ rights against the new property owner to protect them from mistreatment and unfair eviction from the rental premises. In California, a landlord is prohibited from evicting a tenant without following the proper court process that requires the owner to file for an eviction notice on time. Some of the unauthorized actions that amount to unlawful evictions include:
Changing the door locks
Removing tenants from the rentals physically
Locking a tenant out of the building
Thus, if the new landlords change the property into a new business venture by evicting tenants that currently reside, they must follow the proper court process and provide sufficient notice to the tenants and inform their trustee of the intention to make such undertakings.
Chapter 13 Bankruptcy
An alternative type of bankruptcy you can file for is Chapter 13. It provides a more flexible approach to settling your debts because you could retain your property or prevent any foreclosure from occurring. Under chapter 13 bankruptcy, the process pushes for a reorganization strategy for your assets to let you make new debt repayment plans. Most debtors who file for chapter 13 have steady income sources that are reliable enough to settle debts under a new reorganization plan. Additionally, you may also be eligible to file for this type of bankruptcy if your monthly/annual income exceeds the limits set in chapter 7 bankruptcy. Typically the limits set for your eligibility are $394,725 for any unsecured debt. As discussed, unsecured debt involves principal payments like court liability fees for personal injury and tax debts you owe.
On top of this, you will have to undergo a credit counseling program that educates you more on financial management and development, to prevent a relapse or default in following through with the payment plans you intend to use in making debt settlements. After successfully undergoing the counseling program, you will have to compile a list of all creditors and the exact amounts you owe to each. As a landlord, you should also state all rental properties you own and your average monthly expenses. Your bankruptcy attorney will help you source all the documents you need and compile them for the court’s presentation during the petition hearing.
Upon proceeding with a court petition to file for chapter 13 bankruptcy, the judge will then ask for you to submit a well laid out payment plan for all pending debts that will sustain the debt repayment for three to five years. The payment strategies provide the necessary information that the judge needs to assess your monthly expenses and compare it to your suggested payment plan. If the strategies are logical and work towards providing an adequate allowance for making repayments to creditors, you stand a good chance of getting approval and being declared bankrupt.
Suppose you also need to protect your co-signers who acted as guarantors in loans. In that case, chapter 13 bankruptcy prevents the creditors from coming for your co-signers, mainly because the main requirement will be to reorganize your payment plans to promote efficient debt settlement.
Effects of Filing for Chapter 13 Bankruptcy
Landlords and tenants have a relatively more comfortable debt repayment system under chapter 13, primarily because the landlord can retain the rental properties and maintain his/her clients as long as he/she can afford to make consistent payments to the creditors. In this case, all rent revenue collected from the tenants should be forwarded to the creditors based on the payment plan that you and your bankruptcy attorney work out.
Hence, if you are a landlord managing rent payments from several tenants, it is necessary to impose strict rent payment deadlines to ensure that the occupants do not default in payments. The urgency arises from the strict nature of most creditors who may report an issue in defaulting on making debt repayments, even when it is your tenant who delays the process. Often, the creditors may also seek court orders to introduce new account details for use by the tenants in making rent payments to ensure that you do not interfere with the payment amounts. You will still retain title and property ownership despite having no control over monetary transactions about renting in such cases.
Despite this, you may lose your rental property in some cases where it is more likely to bring losses during the debt repayment period. Subsequently, having to sell the property requires you to send your tenants adequate notice of eviction, especially where the new buyer is not interested in leasing or renting the premises. In such instances, the court will grant you some time allowance to ensure that you follow the correct court application procedure for an eviction notice.
However, the judge is prepared to allow you to also make reasonable rent increments for your tenants to balance out the profitability of the property if you would like to retain it. In such cases, it is essential to engage with a certified finance professional who will advise you on a fair rent increment rate to ensure your tenants do not move out in protest. The higher rental prices will also serve to pay off debts simultaneously, meaning that you will have managed to retain a rental property and use the rental payments for your debt clearance.
You also have a chance to rent out an additional non-profitable property, especially if you own several homes or buildings that you had previously categorized for personal use. When new tenants occupy the newly rented out property, you will have to transfer all the rent collected to your creditors based on the payment system you and your lawyer created.
For example, you may channel funds from the rent collected to pay off one debtor within six months. Once that debt is paid off, you can then work out a system to channel funds to another debtor. Alternatively, you may also formulate a plan that transfers funds to each creditor every month for a consistent period. Therefore, your lawyer will guide you through choosing a specific property that you can rent out, to help you retain it even as the creditors continue collecting their debt settlements.
Another critical factor that makes filing for chapter 13 bankruptcy a good option is that you can have a principal reduction. Once the property you owe money for undergoes a principal reduction, its value is reduced to the current fair market price through a process called cramming down. For example, suppose a car dealer is one of your creditors seeking repayments for a car loan. In that case, the principal reduction ensures that you only make repayments to match the vehicle's current market value.
Thanks to principal reduction, you do not have to impose additional rent charges to your tenants. The price drop provides an allowance for you to make debt repayments consistently. Thus, upon applying the principal reduction, you will be subject to new monthly payments that add to the reduced price. Moreover, you may also have the current interest rates reduced to prevent an overdraft of debt payments due.
Overall, chapter 13 bankruptcy provides better debt settlement conditions, primarily because you do not have to lose your property and force your tenants to move out. If you have a proper repayment plan at work, it will be easier to finish repaying your creditors within the stipulated three to five year period.
Find a Bankruptcy Attorney Near Me
When you have to file for bankruptcy, there may be a lot of uncertainty about your investment property, especially if you are a landlord with tenants. Therefore, it is essential to think about the different bankruptcy types you can file for and their effects on your property and tenants. With the help of an experienced bankruptcy attorney, you will identify each bankruptcy option’s merits and demerits. A proper analysis will help you pick the best solution to retain your rental property and reduce the stress that your tenants have to undergo.
At the San Diego Bankruptcy Attorney, you will have access to some of the best bankruptcy attorneys serving San Diego, California. Our expertise in the legal field allows us to provide professional advice on any bankruptcy issues you have to protect your property without challenging setbacks from creditors. To get in touch with us, call us today at 619-488-6168.